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PSX to gain ranking as emerging market; global portfolio investment on the cards

The eye-catching growth of Pakistan Stock Exchange bouncing above the psychological barrier of 50,000 levels, which is considered as an immediate impact of Chinese investments through a consortium of three Chinese brokerage houses, there seems a series of developments in the pipeline including launching of Pakistan Development Fund (PDF) worth Rs150 billion. Besides offering of 20 percent shares to the public to ensure peoples participation in the Pakistan Stock Exchange.

Chinese Ambassador, Sun Wei Dong present at the Pakistan Stock Exchange (PSX) for signing ceremony for 40 percent stake in PSX said that Chinese will share their experience with PSX partners to bring reforms and launch new products.

As an impact of substantial growth at Pakistan stock market following by 40 percent stake acquired by a Chinese consortium, the leading provider of international investment decision support tools Morgan Stanley Capital International (MSCI) has reclassified its Pakistan Index to the higher status of ‘Emerging Markets’. MSCI and the decision in this respect are expected at the Semi-Annual Index Review in May 2017. This improvement in the ranking of Pakistan market is bound to upgrade Pakistan from the stature of ‘Frontier Markets’ to ‘Emerging Markets’ and is expected to generate inflows of global portfolio investment, amounting to $475 million by the middle of 2017.

All Pakistan Business Forum (APBF) has lauded the positive development at PSX, which reassuring that Pakistan’s economic output is rising at a healthy pace. According to APBF, global institutional investors use different MSCI indexes – such as frontier, emerging, China and US markets – to create balanced portfolios to generate maximum returns while keeping in view their overall risk appetite. It may be noted that emerging markets attract far more funds than frontier markets.

Meanwhile, Ibrahim Qureshi, President of APBF said: “During the past few years, economic dynamism in the global economy has gradually been shifting — from advanced economies to emerging markets. Today, the emerging economies comprise of 85 percent of the world’s population, while contributing almost 60 percent of global GDP. While the global recovery has been subdued, emerging economies have contributed more than 80 percent of global growth since the crisis. In the current scenario, Pakistan’s inclusion into the emerging markets is a tremendous achievement. It will create many new opportunities, despite the challenging environment.”

MSCI communicates its conclusions, based on discussions with the international investment community, on a list of markets under review every June. MSCI announced last year that Pakistan was on its list for possible reclassification in view of improvements in transparency and liquidity.

Although the actual reclassification of the index will follow next year, global investors tend to start factoring in the reclassification ahead of the actual change, which prompts massive inflows of global funds in the case of a favorable decision.

The benchmark index of the Pakistan Stock Exchange has already gained 15% this year, making it the best performer in Asia. “The gauge has climbed 4.2% this month, compared with a 0.4% fall in the MSCI Emerging Markets Index.”

It may be recalled that Pakistan was part of the MSCI Emerging Markets Index between 1994 and 2008. However, the temporary closure of the Pakistan Stock Exchange in 2008 led MSCI to remove it from the index and classify it as a “standalone country index”. MSCI made Pakistan a part of the Frontier Markets Index in May 2009 and it has remained as such since then.

COMING EVENTS

The management of Pakistan Stock Exchange is about to launch CPEC’s (China-Pakistan Economic Corridor) infrastructure bonds for trading soon as an outcome of the Chinese investments worth over $54 billion in the corridor projects besides development of a large number of Special Economic Zones alongside the Corridor.

Meanwhile, the Pakistan Stock Exchange is actively engaged in the process of offering another 20% shares (160 million) to general public.

As a result of Chinese deal for acquisition of 40 percent stake or 320 million shares for Rs28 per share in Pakistan stocks, the Chinese consortium is expected to pay approximately $85.5 million to brokers of Pakistan Stock Exchange sometimes in March this year.

CHINESE CONSORTIUM

The Chinese consortium comprised of Chinese Financial Futures Exchange Company Limited, Shanghai Stock Exchange and Shenzhen Stock Exchange along with Pak-China Investment Company and Habib Bank Limited.

Looking visibly happy over the deal with the Chinese partners, the Finance Minister, Ishaq Dar, who was also present in the signing ceremony of the agreement remarked that the partnership with Chinese consortium will also help growth in view of transfer of Chinese expertise and certainly take Pakistan market to the next level of developments.

Hu Zheng, CEO, China Financial Futures Exchange (the leader of the Chinese consortium who also present in the signing ceremony for the purchase 40 percent stake in PSX) said that the consortium has the backing of his government in acquiring the 40 percent stake in PSX.

CONCLUSION

The Chinese investment in Pakistan capital market is expected to broaden economic and financial collaboration between China and Pakistan besides implementation of the One Belt and One Road initiative and the China-Pakistan Economic Corridor. The partnership will bring experience, technological assistance and new products.

China’s financial market has been opening up and getting increasingly connected to global markets. The Shanghai-Hong Kong Stock connect and Shenzhen-Hong Kong Stock connect are key to this opening.

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